Beat the Street With 25 Cents
Aug 28th 2011 8:36AM
Updated Aug 28th 2011 8:38AM
Got a quarter? Can you flip it? Congratulations, you're a stock guru.
For some time now, I've been using Motley Fool CAPS to evaluate the Wall Street analysts who rate stocks, and help you decide whether the picks are worth listening to. In columns like "Get to Know a Guru," we've met the unsung heroes (and villains) of Wall Street. In "This Just In," we put the experts to the test, determining whether their upgrades and downgrades are worth the virtual paper they're printed on.
Today, I want to step back and see the big picture. Using the full breadth of CAPS to take a snapshot of Wall Street's Wise Men, I'll lay out for you who's hot, who's not, and overall, whether these analytical hotshots are smarter than a fifth-grader.
Newsflash: They're not
We often hear the statistic that 80% of mutual funds underperform the market. But until now, it's been hard to fact-check that data. Fortunately, CAPS does something nearly as good. It records every stock pick made by 192 professional stock pickers, from professional talking heads including Jim Cramer to financial bastions like Deutsche Bank. It tracks the analysts' performance, and most importantly, it records whether the picks are beating or lagging the S&P 500's return.
So how are the experts doing? Not so hot. Of the 192 professional players we track on CAPS, only 89 boast better than 50% "accuracy" on their picks -- well under half.
Wall Street wall of shame
Without further ado, allow me to introduce you to "Wall Street's Dirty Half-Half-Dozen" -- three of the least-accurate institutional investors on record, according to our up-to-the-minute analyst rankings on CAPS:
"Wall Street Worst" Firm
A Better Plan
|ISI Group||11%||VMware (NYS: VMW)||EMC (NYS: EMC)|
|Compass Point||15%||Comerica (NYS: CMA)||Wells Fargo (NYS: WFC)|
|Ardour Capital||33%||Suntech Power (NYS: STP)||ExxonMobil (NYS: XOM)|
Source: Motley Fool CAPS. As of Aug. 25.
As you can see, I've also taken the liberty of tagging each of these inaccurate analysts with one of their most recent bad picks. Now allow me to tell you why it's a bad pick -- and suggest a better alternative for your investing dollars.
We begin with ISI Group and its "optimistic" suggestion that virtual storage specialist VMware might be a worthy investment ... at a price 65 times the amount of profit it earned over the past year. Even if Wall Street is right about VMware growing at 25% per year over the next five years (an aggressive target by any measure), that still leaves us with a stock selling for a 2.6 PEG ratio -- extremely aggressive, in my opinion.
But here's the good news: if you like VMware, you're going to love the company that owns most of its stock -- EMC. This one costs only 22.5 times earnings, barely a third the earnings multiple that sexier VMware fetches. EMC's also growing right quickly, pegged for 16% long-term earnings growth. And because EMC generates much more free cash flow than it reports as net income, the stock costs only about 12.3 times the amount of free cash it generates in a year. To me, that makes EMC the smarter buy.
Next up: Compass Point and its advice to buy Midwest regional banker Comerica. At first glance, this looks like good advice. Comerica costs only 12 times earnings, pays a respectable 1.7% dividend yield, and is pegged for 17% long-term growth. That's not bad -- but I think we can do better.
How about ... Wells Fargo? The growth here isn't as sprightly, at "only" 14% per year. But Wells boasts other advantages over Comerica. For one thing, it's cheaper at just 9.5 times earnings. For another, its dividend is richer -- a clean 2%. For a third, Warren Buffett loves it. His Berkshire Hathaway (NYS: BRK.B) investment vehicle is currently Wells' biggest shareholde r.
Last but not least ("least" would be ISI, with its record of 11% accuracy), we come to Ardour Capital and its oh-so-circa-2008 advice to invest in solar power, and Suntech Power. Again, at first glance this looks like sound advice. Suntech only costs 6 times earnings after all. Cheap, right?
Well, maybe not as cheap as you think. Solar stocks haven't been doing so hot lately, in case you haven't noticed. And according to most Wall Street analysts, Suntech itself will be lucky to grow even 7% per year over the next five years.
Instead of investing in the shiny and new, investors might be better advised to go with the old and true: ExxonMobil, and its glistening pools of black gold. Like Suntech, Exxon is pegged for about 7% long-term growth. Like Suntech, it's cheap at less than 10 times earnings. Unlike Suntech, though, Exxon has a proven, century-old business model that generates profits year-in and year-out, making Exxon feel confident enough to pay its investors a generous 2.6% dividend yield.
Foolish final thought
So there you have it, folks. Three bad analysts, three less-than-great stock ideas -- and three more ideas I think will beat the pros' picks with a stick. Want to see if my predictions hold up?
At the time this article was published Fool contributor Rich Smith does not own (or short) any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 379 out of more than 180,000 members. The Motley Fool has a disclosure policy.The Motley Fool owns shares of Berkshire Hathaway and EMC. The Fool owns shares of and has created a ratio put spread position on Wells Fargo. Motley Fool newsletter services have recommended buying shares of Berkshire Hathaway and VMware.We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
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